Monday, October 21, 2013

For a KiwiFund

Over the weekend, NZ First leader Winston Peters laid out his bottom line for coalition negotiations: turning KiwiSaver into a government-backed "KiwiFund", which would invest in New Zealand rather than overseas. Naturally, John Key has panned this policy, likening it to communism, but its an excellent idea. Here's why.

Firstly, and most importantly, it would almost certainly increase returns to savers. Firstly because it would immediately free up the $385 million the ticket-clippers and shysters have taken from kiwisavers in fees over the last fives years, and secondly because the government is simply better at managing money than the market is. The latter is heresy to the political right, but the facts speak for themselves: most Kiwisaver funds return between 5.5% and 8% over three years. The New Zealand Superannuation Fund returns about 11.25%. You need to be with a very good "aggressive" fund to beat that, and then you have to deal with the fact that your retirement savings could disappear with one bad bet. The NZSF is safe and risk-free.

Secondly, because it removes a large chunk of risk from the equation. At the moment if your Kiwisaver fund goes under, because its managers made poor bets with other people's money, or simply decided to take the lot on holiday to Las Vegas and Monaco, you're screwed. A government guarantee solves that problem for individual savers, and gives us certainty. A government provider is the cost of that guarantee, but it seems like one worth paying, especially since the government is unlikely to decide to "invest" your funds in horse-racing and hookers.

And thirdly, because investing more of the funds in New Zealand will have wider economic benefits. Our long-term problem as an economy has been a lack of capital for development, meaning that successful small businesses have trouble turning into large ones. Directing superannuation savings towards domestic investment will solve this problem, and give kiwi businesses access to the capital they need without having to go begging overseas.

There's a lot to like here, and no real downside. The only question is implementation. The easiest method would be to establish a public provider, and make it the default; people could choose lower, riskier returns if they wanted, but only motivated morons would. Kiwisaver allows transfers, so those who are already signed up to poorly-performing private schemes can shift over. The public provider could then outcompete the private ones, and the parasitic NZ "savings" industry can die a natural death. And those that don't suffer that fate will avoid it because they're offering a combination of risk and return equal or superior to the government option and offering positive benefits to their customers, earning their fees rather than merely clipping the ticket. Either way, its a win for savers. The only loser is the underperforming finance industry which can't live up to its own rhetoric.

Will it happen? On recent polling, Winston is irrelevant anyway, but the Greens are sympathetic to the idea, and I don't think it would be hard to convince Labour to introduce a government option to force the market to lift its game. So we may see some version. The question is whether we'll see them go the whole way into default provider territory - but that might just be a matter of giving it a few years for the government provider to prove itself...